How to Use Standard Costs

 

Standard costs are commonly used in manufacturing environments.  Standard costs allow you to break down costs on manufactured items into separate elements for material, setup, labor, outside processing, fixed overhead, and variable overhead.

Because it is impossible to collect precise actual costs for all these variables, much less track them through multiple level product structures, standard costs are often used.

If the Inventory Costing method is set to Standard, then all receipts to stock will take place at Standard Cost and any difference between the Purchase Order price or Work Order actual cost will post to Variance.

As work orders are completed, actual costs are compared with standard costs in order to continually refine the standards for maximum accuracy.

The average cost is recalculated with each inventory transaction.  The average cost will be extremely accurate for purchased items.  When it comes to manufactured items, though, it is difficult, if not impossible, to know the exact manufactured cost at the time finished goods are put into inventory.

The items may go into stock, or they may be immediately issued to a higher level assembly, or both.  Parts may be completed over a long period of time before the job is closed and final costs are in.  For all these reasons, standard costs are often used at the time manufactured items are received to inventory.

At the end of the month, work orders that have been fully completed can be fully costed and compared with the standard cost.  There will always be some variance.  This variance represents the difference between standard cost and actual cost.

IN-N-A  Print Month End Inventory Costing provides a breakdown of all inventory transactions in the following categories:

Adjustments

Stock Issues to WIP

Purchase Receipts to WIP

Purchase Receipts to Stock

Shipments

Work Order Receipts to Stock

Receipts to QC

Outside Processing Receipts

PO Price Change

Scrap

Within each category the costs are shown at both standard and actual, along with the variance.  The report subtotals by item class.

If you wish to capture the variances of closed work orders for the period, you can run IN-N-C, Print Closed Work Ord Costing.  This report will show standard and actual costs and variances for material, labor, setup, outside processing, fixed and variable overhead.

In AD-A  General Ledger Defaults you may specify whether inventory accounts in the General Ledger are to be automatically posted or not for the following transactions: inventory adjustments, sales (invoices), purchases, work order transactions.

Another advantage to using standard costs is that the standard cost represents your best approximation of what the item would cost if you had to manufacture it tomorrow.  An average cost only represents past history; if you hadn't manufactured the item recently, the cost could be inaccurate. For this reason, standard costs are best used for making pricing decisions on manufactured items.

With the standard cost system you only have be concerned with accuracy at the item level. BM-G  Print/Rollup Standard Costs calculates the standard costs up through all levels of the product structure.

If you have a price increase on a component that is used on many different products, simply change the standard cost on the component, run the cost rollup, and you will have recosted all products that use that component.

Finally, if you are using the Estimating module, ES-A  Enter Estimates will use the standard cost for materials wherever RFQ's are not used or no entry exists in ES-H  Enter Material Costs.